14 comments:

sandy
said...

I am just a simple sort of chap, retired in Sotogrande. What I cannot understand is how the spanish politicians seem to be able to breeze along, relaxed and smiling, when there are one million new unsold apartments out there, and 20% unemployment! Just what are they on? Can I have some?

I don't think they are scared - I think they assume that when the good times return the foreigners will flock back and mop up all the properties. But my own calculations here in Sotogrande indicate that the relative cost of Spanish properties has increased by a factor of 4. In order to get back on an even keel my advice would be that 1) all property prices are halved 2) Spain leaves the euro and devalues by 50%. This would put the properties back to 25% of their top price, and the Brits and Swedes and Finns and Germans would resume their holiday/retirement immigration policy. This maybe seems a bit extreme, but are there any other realistic scenarios...please?

I don't see how leaving the Euro would help people pay off their Euro-dominated mortgages.

As long as people continue to pay their mortgages, it doesn't really matter to the banks if real estate prices keep falling. The contracts here are draconian enough that walking away from an underwater mortgage isn't a very good alternative.

Dick - leaving the Euro is an impossibility (for the next decade at least) and would be devastating to Spain. Anyone thinking that leaving the very union that provides stability is beneficial is dreaming. I read a few years back that Spain property rise and fall (percentage wise) almost exactly to the US housing prices...with a delay of 1 to 2 years. Its been a little over a year that US housing prices have plummeted, and I do not see the same thing in Spain. Furthermore, that graph that I saw (i believe it was on Eurointelligence.com) took Spain as a single country. Since Spain is part of the Euro, I would think that that graph would no longer remain valid. But who knows, Spain is a bizarre beast, and the Spanish would prefer to drown holding the keys in their hand before lowering prices.

Let me see now... a de facto default on hundreds of billions of euros worth of covered bonds held outside of Spain, bringing the entire European banking system to its knees. Great idea! Why didn't I think of that?

With all due respect, something I find sorely lacking in foreign commentaries is an awareness that Spain is not a country three kilometres wide extending from Ayamonte to La Jonquera. Fortunately, the current government is not labouring under that illusion.

On the other hand, I too long for the days when a smiling, illiterate ninny in Islantilla would pitch up a wine and a tapa for 25 Canadian cents.

I read a good article (good cause me liked it! -- trying to write this with a Forrest Gump accent). here it is: http://news.kyero.com/2010/07/06/international-interest-in-spanish-house-prices/I am in no way trying to promote another website, I have ZERO affiliation with it, or its author. Just sharing information I read and think you would all be interested in reading. Charles - if this is against your blog policy, I apologize and will refrain from doing it going forward. Cheers.

The effect you're seeing in both the US and Spain reflects the entry of foreign capital. House prices correlate very highly to current account deficits - even more than to interest rates.

What you're not getting is that the American model of house pricing is not very applicable here. Two things - cost of carry (suspecting that you are tempted to calculate the first interest payment on a 40 year mortgage as a permanent expense over the life of the dwelling) and the effect of purchases on housing stock. Americans do not buy second houses. They can't afford to because of property taxes. Virtually 100% of all US house purchases not accounted for by long term increasing population involve the sale of an existing dwelling. The total housing stock does not change.

In Spain, between demographic changes, foreigners purchasing (limited, but not zero, as it might be at this moment), the locals buying apartments on the beach or in their home town and failing to sell existing or inherited properties in order to do so because they are considered a better store of value than money, perhaps 50% (?) of house sales here actually reduce existing inventory.

In the US, this is a zero-sum game. In Spain, it is not.

And I just read your second comment...

No problem with posting links. The piece is infinitely better than the norm. Thank you.

He's right about Ministry of Housing numbers, but wrong about prices. Relative prices can be inferred from mortgage statistics, which are public. One caveat. He does not pretend to be talking about anything that is more than three km from the beach. Like I said before, the Spain that this blog deals with is a much bigger country than that.

I bow to your wider and more educated view of Spanish economics. I would just make 2 comments - 1) at least my solution IS a real solution, even if it is extreme, and just maybe it is the first one anyone has seen, and 2) the penny does not seem to have dropped in the Spanish ruling classes that the only reason that the foreigners are here is that it is CHEAP!

Dick - your solution about exiting the Euro is NOT real (unless ALL members exit). It is insanity. I agree and also wish that the Euro would tank (my income is in foreign currency) but objectively speaking, it would fixate Spain as a 3rd world country, impoverish its people (remember Spain imports practically ALL of its energy, and consumer goods). The euro deminated mortgages can be resolved by changing them to pesetas, but the issue would be the 35% corporate debt in foregin currency AND the 100% government debt in Euros. You can change the rules internally, but if you are playing with a foreign investor you cannot. Furthermore, banks issue bonds, to foreign buyers, in euros. CHanging their balance sheet assets from Euros to Pesetas would be the kiss of the death. I´m sorry, but you´ll still need to pay 1 euro and change for that caña.

Yes, you are right. I was just trying to imagine a scenario where the million apartments get sold and occupied, and the 20% unemployment shrinks to 5-10 %. If things stay as they are, I cannot see any of that happening.

I dunno, Dick. A quick look shows the lowest unemployment rate ever in Cadiz province to have been about 13% in both 2006 and 2007. That nonsense should tell you what to make of the 20 percent for the entire country.

I guess you are saying that the black economy will give a lot of people jobs, so from that point of view, life can still go on. But what about all those apartments? The type of foreigner they are aimed at is just not coming any more now that Spain is no longer cheap! Are they just going to stand empty, monuments to local town planning and bankers stupidities? My original idea has been proved to be silly. Anybody out there got a better one?

Dick - I´m with you on discounting the apartments 50%, but not on the devaluation idea or leaving the euro. I had it out with Charles on the discount idea already in another post. From the property owner standpoint, if individual, they will be better off holding onto the empty apt, as they are still personally liable for the mortgage value. From a corporate owner (inmobiliaria, constructoras) they are better off giving it to banks, who have, so far, kept the highest value on their balance sheets.